NASAA Series 65, Uniform Investment Adviser Law ExaminationEconomic Factors and Business InformationMedium
A company's financial statements show retained earnings at the beginning of the year as $1,500,000. During the year, the company earned a net income of $300,000 and paid out $100,000 in dividends. What are the company's retained earnings at the end of the year?
- A$1,400,000
- B$1,800,000
- C$1,900,000
- D$1,700,000
Show answer & explanationAnswer & explanation
Correct answer: D. $1,700,000
Retained earnings are calculated as Beginning Retained Earnings + Net Income - Dividends Paid. So, $1,500,000 + $300,000 - $100,000 = $1,700,000.
Why the other options are wrong
- A. This incorrectly subtracts net income instead of adding it.
- B. This only adds net income, not subtracting dividends.
- C. This incorrectly adds dividends instead of subtracting them.
Retained Earnings Calculation
The cumulative amount of net income a company has retained over time, after paying dividends.
- Calculated as: Beginning Retained Earnings + Net Income - Dividends.
- Important component of owner's equity on the balance sheet.
- Represents profits reinvested in the business.
Memory trick: It's the profit piggy bank: add new profits, subtract what's paid out.